What’s the Difference between Term & Whole Life Insurance?
Term life insurance covers you for death benefits only and for a period (term) of time.
For example, you may take out a term insurance policy for 20 years to cover your home mortgage in the event of your death anytime during those 20 years. After the 20 years have passed, if you are still alive, this insurance ends, no more premiums are paid by you and there is no longer any value to your term policy. Another example of term insurance would be to pay off your car loan if you should die before the loan is paid off. Typically, term insurance is less expensive than whole life insurance but once the term is over, there is no value left in the policy.
Whole life insurance typically covers your whole life. In addition, whole life insurance covers you not only for death benefits, but also comes with an additional feature known as cash value. A part of the premium you pay goes into the cash value portion of your policy. So over time, the cash value increases as more premium payments are made. The cash value portion of your whole life insurance policy also is an interest bearing account. Another feature of this type of plan is the ability to borrow from your cash value if needed.
Advantages of Whole Life Insurance
As mentioned, a whole life policy covers you for your entire lifetime. The premiums you pay are guaranteed for the lifetime of a policy, that is guaranteed not to increase. Although the premiums are typically more expensive than a term policy, they never increase. On the contrary, term policy premiums typically increase when the initial term expires and often these increases are substantial.
Life insurance gets more expensive as you age and the cost of renewing a 20-year term policy when you’re in your late sixties or early seventies will be a bit of a shock. With whole life, your family will have insurance protection for your entire lifetime, with the premiums never increasing, the face amount never decreasing, and the buildup in your cash value portion of your policy.
Whole Life Savings/Investment Feature
A whole life policy may be an excellent solution for you if you have problems saving or investing money. Additionally, one of the best benefits of a whole life plan is the ability to take loans (usually non-taxable) from the policy. Also, the benefit is non-taxable when paid to your beneficiaries upon your death.
Whole Life Insurance Premiums AreGuaranteed
The premiums you pay are guaranteed not to ever increase and you are also guaranteed a minimum rate of interest on the cash value accumulation portion on most policies. Rates of return vary from policy to policy. Additionally, when the economy is good, the interest rate typically increases and when the economy is not good, you are still guaranteed a minimum rate of return on your cash value accumulation.
You Can Borrow Against the Cash Value of a Whole Life Policy
You can borrow up to certain percentage of the cash value in your policy after a set number of years and use the money for whatever you desire. You have the option of either re-paying the loan if you choose to do so or not. If you don’t repay the loan, the amount of your death benefit when you die would decrease.
Juvenile Insurance Whole Life Plans
Juvenile life insurance is permanent, whole life insurance that insures the life of a minor. It is an excellent financial planning tool that provides a tax advantaged savings vehicle with potential for a lifetime of benefits. Juvenile life insurance, also known as child life insurance, is usually purchased to protect a family against the sudden and unexpected costs of a funeral and burial for their child. Should the juvenile survive to college years and beyond, the policy will have the typical benefits of whole life plans.
Are there Negatives to a Whole Life Insurance Policy?
Whole Life Is More Expensive
A whole life policy typically costs substantially more than what you would pay for a term life insurance policy. This is because part of the premium goes into your cash value portion of your policy.
Low Interest Rates on Whole Life Policies
If you are investment oriented or work with a financial planner, the interest rate you earn on your money invested in other investments such as stocks, mutual funds, etc. could be substantially more than the interest rate you are earning on the cash value portion of your whole life insurance policy.
Whole Life is Inflexible
A whole life policy is very inflexible compared to other types of life insurance policies such as universal life for example. You won’t know how your premium is being used and what portion of the premium is being applied to the death benefits or how much is going to the cash value accumulation.
You usually have no choice about changing any part of a whole life policy. A universal policy allows you to alter your death benefit and gives you some flexibility in how you pay your premiums.
No Investment Options on Whole Life Policies
A whole life policy does not give you any say in how the cash value accumulation is invested. If the investments made by the insurance company perform well, then you also benefit, but if they do poorly then at best you will only get the guaranteed minimum rate of return.
Other policies such as a variable life insurance policy give more options in how the money should be invested and allow you to choose between bonds, a money market or the stock market.
Need More Information on Which type of Insurance is Right for You?
Whole life insurance plans and term plans are both valuable and important. Deciding which one is right for you should be discussed with your independent insurance broker. Brenmark Insurance Advisors can you help you make the right decision. We work with many high rated insurance carriers and we shop and find the best policies for our clients at the most affordable rates. Remember too, if you have health issues, we work with insurance companies that will issue a policy for you.